UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-12103

PEOPLES FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Mississippi	64-0709834
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
Lameuse and Howard Avenues, Biloxi, Mississippi	39533
(Address of principal executive offices)	(Zip Code)

(228) 435-5511

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes   ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes   ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer” , “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ☐    No  ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None	PFBX	None

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date. Peoples Financial Corporation has only one class of common stock authorized. At April 30, 2019, there were 15,000,000 shares of $1 par value common stock authorized, with 4,943,186 shares issued and outstanding.

Part 1 – Financial Information

Item 1: Financial Statements

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Condition

(in thousands except share data)

	March 31, 2019		December 31, 2018
	(unaudited)		(audited)
Assets
Cash and due from banks	$	39,087	$	17,191
Available for sale securities		222,119		222,110
Held to maturity securities, fair value of $54,512 at March 31, 2019; $53,459 at December 31, 2018		54,632		54,598
Other investments		2,751		2,811
Federal Home Loan Bank Stock, at cost		2,077		2,069
Loans		267,492		273,346
Less: Allowance for loan losses		5,376		5,340
Loans, net		262,116		268,006
Bank premises and equipment, net of accumulated depreciation		18,562		18,879
Other real estate		8,873		8,943
Accrued interest receivable		2,305		1,956
Cash surrender value of life insurance		18,982		18,841
Other assets		1,457		1,382
Total assets	$	632,961	$	616,786

2

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Condition (continued)

(in thousands except share data)

	March 31, 2019			December 31, 2018
	(unaudited)			(audited)
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Demand, non-interest bearing	$	130,184		$	114,512
Savings and demand, interest bearing		301,044			278,772
Time, $100,000 or more		43,115			52,787
Other time deposits		46,994			27,435
Total deposits		521,337			473,506
Borrowings from Federal Home Loan Bank		1,068			36,142
Employee and director benefit plans liabilities		18,542			18,415
Other liabilities		1,329			1,789
Total liabilities		542,276			529,852
Shareholders’ Equity:
Common stock, $1 par value, 15,000,000 shares authorized, 4,943,186 shares issued and outstanding at March 31, 2019 and December 31, 2018		4,943			4,943
Surplus		65,780			65,780
Undivided profits		20,729			20,324
Accumulated other comprehensive loss		(767	)		(4,113	)
Total shareholders’ equity		90,685			86,934
Total liabilities and shareholders’ equity	$	632,961		$	616,786

See Notes to Consolidated Financial Statements.

3

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Income

(in thousands except per share data)(unaudited)

	Three Months Ended March 31,
	2019		2018
Interest income:
Interest and fees on loans	$	3,689	$	3,233
Interest and dividends on securities:
U.S. Treasuries		294		379
U.S. Government agencies		125		122
Mortgage-backed securities		822		550
Collateralized mortgage obligations		12
States and political subdivisions		460		439
Other investments		11		3
Interest on balances due from depository institutions		87		39
Total interest income		5,500		4,765
Interest expense:
Deposits		802		476
Borrowings from Federal Home Loan Bank		78		20
Total interest expense		880		496
Net interest income		4,620		4,269
Provision for allowance for loan losses		54		35
Net interest income after provision for allowance for loan losses	$	4,566	$	4,234

4

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Income (continued)

(in thousands except per share data)(unaudited)

	Three Months Ended March 31,
	2019		2018
Non-interest income:
Trust department income and fees	$	371	$	433
Service charges on deposit accounts		882		911
Increase in cash surrender value of life insurance		105		107
Other income		108		111
Total non-interest income		1,466		1,562
Non-interest expense:
Salaries and employee benefits		2,734		2,829
Net occupancy		474		440
Equipment rentals, depreciation and maintenance		833		758
FDIC and state banking assessments		102		114
Data processing		347		327
ATM expense		169		138
Other real estate expense		50		120
Loss from other investments		60		39
Other expense		858		739
Total non-interest expense		5,627		5,504
Net income	$	405	$	292
Basic and diluted earnings per share	$	.08	$	.06
Dividends declared per share	$		$

See Notes to Consolidated Financial Statements.

5

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)(unaudited)

	Three Months Ended March 31,
	2019		2018
Net income	$	405	$	292
Other comprehensive income (loss):
Net unrealized gain (loss) on available for sale securities		3,346		(2,594	)
Total other comprehensive income (loss)		3,346		(2,594	)
Total comprehensive income (loss)	$	3,751	$	(2,302	)

See Notes to Consolidated Financial Statements.

6

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

(in thousands except share data)

												Accumulated
	Number of											Other
	Common			Common					Undivided			Comprehensive
	Shares			Stock			Surplus		Profits			Loss			Total
Balance, January 1, 2018		5,083,186		$	5,083		$	65,780	$	21,563		$	(2,927	)	$	89,499
Net income										292						292
Other comprehensive loss													(2,594	)		(2,594	)
Retirement of stock		(10,392	)		(10	)				(135	)					(145	)
Balance, March 31, 2018		5,072,794		$	5,073		$	65,780	$	21,720		$	(5,521	)	$	87,052
Balance, January 1, 2019		4,943,186		$	4,943		$	65,780	$	20,324		$	(4,113	)	$	86,934
Net income										405						405
Other comprehensive income													3,346			3,346
Balance, March 31, 2019		4,943,186		$	4,943		$	65,780	$	20,729		$	(767)		$	90,685

Note: Balances as of January 1, 2018 and 2019 were audited.

See Notes to Consolidated Financial Statements.

7

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)(unaudited)

	Three Months Ended March 31,
	2019			2018
Cash flows from operating activities:
Net income	$	405		$	292
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		488			480
Provision for allowance for loan losses		54			35
Writedown of other real estate					17
Loss on sales of other real estate		20			4
Loss from other investments		60			39
Amortization of available for sale securities		50			113
Amortization of held to maturity securities		66			61
Change in accrued interest receivable		(349	)		(194	)
Increase in cash surrender value of life insurance		(105	)		(107	)
Change in other assets		(75	)		(65	)
Change in other liabilities		(333	)		(483	)
Net cash provided by operating activities	$	281		$	192

8

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (continued)

(in thousands) (unaudited)

	Three Months Ended March 31,
	2019			2018
Cash flows from investing activities:
Proceeds from maturities of available for sale securities	$	8,104		$	13,285
Purchases of available for sale securities		(4,817	)		(10,723	)
Proceeds from maturities and calls of held to maturity securities		520			220
Purchases of held to maturity securities		(620	)
Purchases of Federal Home Loan Bank stock		(8	)		(62	)
Proceeds from sales of other real estate		419			120
Loans, net change		5,467			4,267
Acquisition of bank premises and equipment		(171	)		(247	)
Investment in cash surrender value of life insurance		(36	)		(21	)
Net cash provided by investing activities		8,858			6,839
Cash flows from financing activities:
Demand and savings deposits, net change		37,944			6,380
Time deposits, net change		9,887			2,986
Borrowings from Federal Home Loan Bank		223,250			161,400
Repayments to Federal Home Loan Bank		(258,324	)		(171,414	)
Retirement of common stock					(145	)
Net cash provided by (used in) financing activities		12,757			(793	)
Net increase in cash and cash equivalents		21,896			6,238
Cash and cash equivalents, beginning of period		17,191			25,281
Cash and cash equivalents, end of period	$	39,087		$	31,519

See Notes to Consolidated Financial Statements.

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PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

For the three Months Ended March 31, 2019 and 2018

1. Basis of Presentation:

Peoples Financial Corporation (the “Company”) is a one-bank holding company headquartered in Biloxi, Mississippi. The Company has two operating subsidiaries, PFC Service Corp., an inactive company, and The Peoples Bank, Biloxi, Mississippi (the “Bank”). The Bank provides a full range of banking, financial and trust services to state, county and local government entities and individuals and small and commercial businesses operating in those portions of Mississippi, Louisiana and Alabama which are within a fifty mile radius of the Waveland, Wiggins and Gautier branches, the Bank’s three most outlying locations (the “trade area”).

The accompanying unaudited consolidated financial statements and notes thereto contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly, in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the financial position of the Company and its subsidiaries as of March 31, 2019 and the results of their operations and their cash flows for the periods presented. The interim financial information should be read in conjunction with the annual consolidated financial statements and the notes thereto included in the Company’s 2018 Annual Report and Form 10-K.

The results of operations for the quarter ended March 31, 2019, are not necessarily indicative of the results to be expected for the full year.

Use of Estimates - The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Material estimates common to the banking industry that are particularly susceptible to significant change in the near term include, but are not limited to, the determination of the allowance for loan losses, the valuation of other real estate acquired in connection with foreclosure or in satisfaction of loans and valuation allowances associated with the realization of deferred tax assets, which are based on future taxable income.

Summary of Significant Accounting Policies - The accounting and reporting policies of the Company conform to GAAP and general practices within the banking industry. There have been no material changes or developments in the application of principles or in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies as disclosed in our Form 10-K for the year ended December 31, 2018.

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Accounting Standards Update 2016-13 (“ASU 2016-13”), Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, is intended to provide financial statement users with more decision-useful information related to expected credit losses on financial instruments and other commitments to extend credit by replacing the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. ASU 2016-13 is effective for the Company for interim and annual periods beginning after December 15, 2019 and the Company intends to adopt ASU 2016-13 during the first quarter of 2020. The Company’s Current Expected Credit Loss (CECL) Committee continues to evaluate the impact this ASU will have on the Company’s financial position, results of operations and financial statement disclosures and determine the most appropriate method of implementing this ASU. Management will continue to evaluate the impact this ASU will have on the Company’s consolidated financial statements through its effective date.

2. Earnings Per Share:

Per share data is based on the weighted average shares of common stock outstanding of 4,943,186 and 5,080,514 for the three months ended March 31, 2019 and 2018, respectively.

3. Statements of Cash Flows:

The Company has defined cash and cash equivalents as cash and due from banks. The Company paid $852,975 and $489,389 for the three months ended March 31, 2019 and 2018, respectively, for interest on deposits and borrowings. No income tax payments were made during the three months ended March 31, 2019 and 2018. Loans transferred to other real estate amounted to $369,054 and $753,674 during the three months ended March 31, 2019 and 2018, respectively.

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4. Investments:

The amortized cost and fair value of securities at March 31, 2019 and December 31, 2018, are as follows (in thousands):

March 31, 2019	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for sale securities:
U.S. Treasuries	$	85,878	$	4	$	(1,554	)	$	84,328
U.S. Government agencies		12,492		34		(109	)		12,417
Mortgage-backed securities		109,218		866		(701	)		109,383
Collateralized mortgage obligations		4,821		88					4,909
States and political subdivisions		10,998		84					11,082
Total available for sale securities	$	223,407	$	1,076	$	(2,364	)	$	222,119
Held to maturity securities:
U.S. Government agencies	$	8,185	$		$	(162	)	$	8,023
States and political subdivisions		46,447		325		(283	)		46,489
Total held to maturity securities	$	54,632	$	325	$	(445	)	$	54,512
December 31, 2018	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for sale securities:
U.S. Treasuries	$	85,866	$		$	(2,443	)	$	83,423
U.S. Government agencies		17,492		14		(259	)		17,247
Mortgage-backed securities		112,391		231		(2,278	)		110,344
States and political subdivisions		10,994		102					11,096
Total available for sale securities	$	226,743	$	347	$	(4,980	)	$	222,110
Held to maturity securities:
U.S. Government agencies	$	8,185	$		$	(371	)	$	7,814
States and political subdivisions		46,413		89		(857	)		45,645
Total held to maturity securities	$	54,598	$	89	$	(1,228	)	$	53,459

12

The amortized cost and fair value of debt securities at March 31, 2019 (in thousands), by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized Cost		Fair Value
Available for sale securities:
Due in one year or less	$	24,248	$	24,136
Due after one year through five years		77,215		75,969
Due after five years through ten years		9,892		9,752
Due after ten years		2,834		2,879
Mortgage-backed securities		109,218		109,383
Totals	$	223,407	$	222,119
Held to maturity securities:
Due in one year or less	$	2,496	$	2,498
Due after one year through five years		19,493		19,461
Due after five years through ten years		18,319		18,306
Due after ten years		14,324		14,247
Totals	$	54,632	$	54,512

13

Available for sale and held to maturity securities with gross unrealized losses at March 31, 2019 and December 31, 2018, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows (in thousands):

	Less Than Twelve Months				Over Twelve Months				Total
			Gross				Gross				Gross
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
March 31, 2019:
U.S. Treasuries	$		$		$	83,324	$	1,554	$	83,324	$	1,554
U.S. Government agencies						17,906		271		17,906		271
Mortgage-backed securities						57,263		701		57,263		701
States and political subdivisions		269		1		17,376		282		17,645		283
TOTAL	$	269	$	1	$	175,869	$	2,808	$	176,138	$	2,809
December 31, 2018:
U.S. Treasuries	$	999	$	1	$	82,424	$	2,442	$	83,423	$	2,443
U.S. Government agencies		4,939		61		17,608		569		22,547		630
Mortgage-backed securities		24,834		293		55,649		1,985		80,483		2,278
States and political subdivisions		8,470		122		19,678		735		28,148		857
TOTAL	$	39,242	$	477	$	175,359	$	5,731	$	214,601	$	6,208

At March 31, 2019, 17 of the 18 securities issued by the U.S. Treasury, 4 of the 5 securities issued by U.S. Government agencies, 43 of the 145 securities issued by states and political subdivisions and 24 of the 45 mortgage-backed securities contained unrealized losses.

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Management evaluates securities for other-than-temporary impairment on a monthly basis. In performing this evaluation, the length of time and the extent to which the fair value has been less than cost, the fact that the Company’s securities are primarily issued by U.S. Treasury and U.S. Government Agencies and the cause of the decline in value are considered. In addition, the Company does not intend to sell and it is not more likely than not that it will be required to sell these securities before maturity. While some available for sale securities have been sold for liquidity purposes or for gains, the Company has traditionally held its securities, including those classified as available for sale, until maturity. As a result of the evaluation of these securities, the Company has determined that the unrealized losses summarized in the tables above are not deemed to be other-than-temporary.

There were no sales or calls of available for sale debt securities during the three months ended March 31, 2019 and 2018.

Securities with a fair value of $236,946,244 and $206,017,056 at March 31, 2019 and December 31, 2018, respectively, were pledged to secure public deposits, federal funds purchased and other balances required by law.

5. Loans:

The composition of the loan portfolio at March 31, 2019 and December 31, 2018, is as follows (in thousands):

	March 31, 2019		December 31, 2018
Gaming	$	24,375	$	25,767
Hotel/Motel		45,402		44,112
Real estate, construction		27,209		31,597
Real estate, mortgage		136,438		137,437
Commercial and industrial		27,708		27,505
Other		6,360		6,928
Total	$	267,492	$	273,346

15

The age analysis of the loan portfolio, segregated by class of loans, as of March 31, 2019 and December 31, 2018, is as follows (in thousands):

													Loans Past
													Due Greater
	Number of Days Past Due												Than 90
					Greater		Total				Total		Days &
	30 - 59		60 - 89		Than 90		Past Due		Current		Loans		Still Accruing
March 31, 2019:
Gaming	$		$		$		$		$	24,375	$	24,375	$
Hotel/Motel										45,402		45,402
Real estate, construction		1,022		8		711		1,741		25,468		27,209
Real estate, mortgage		3,091		516		535		4,142		132,296		136,438
Commercial and industrial		59		27		1,145		1,231		26,477		27,708
Other		93		23				116		6,244		6,360
Total	$	4,265	$	574	$	2,391	$	7,230	$	260,262	$	267,492	$
December 31, 2018:
Gaming	$		$		$		$		$	25,767	$	25,767	$
Hotel/Motel										44,112		44,112
Real estate, construction		1,987		340		860		3,187		28,410		31,597
Real estate, mortgage		2,866		7,129		1,730		11,725		125,712		137,437
Commercial and industrial		9		110		1,661		1,780		25,725		27,505
Other		107		3				110		6,818		6,928
Total	$	4,969	$	7,582	$	4,251	$	16,802	$	256,544	$	273,346	$

The Company monitors the credit quality of its loan portfolio through the use of a loan grading system. A score of 1 – 5 is assigned to the loan based on factors including repayment ability, trends in net worth and/or financial condition of the borrower and guarantors, employment stability, management ability, loan to value fluctuations, the type and structure of the loan, conformity of the loan to bank policy and payment performance. Based on the total score, a loan grade of A, B, C, S, D, E or F is applied. A grade of A will generally be applied to loans for customers that are well known to the Company and that have excellent sources of repayment. A grade of B will generally be applied to loans for customers that have excellent sources of repayment which have no identifiable risk of collection. A grade of C will generally be applied to loans for customers that have adequate sources of repayment which have little identifiable risk of collection. A grade of S will generally be applied to loans for customers who meet the criteria for a grade of C but who also warrant additional monitoring by placement on the watch list. A grade of D will generally be applied to loans for customers that are inadequately protected by current sound net worth, paying capacity of the borrower, or pledged collateral. Loans with a grade of D have unsatisfactory characteristics such as cash flow deficiencies, bankruptcy filing by the borrower or dependence on the sale of collateral for the primary source of repayment, causing more than acceptable levels of risk. Loans 60 to 89 days past due receive a grade of D. A grade

16

of E will generally be applied to loans for customers with weaknesses inherent in the “D” classification and in which collection or liquidation in full is questionable. In addition, on a monthly basis the Company determines which loans are 90 days or more past due and assigns a grade of E to them. A grade of F is applied to loans which are considered uncollectible and of such little value that their continuance in an active bank is not warranted. Loans with this grade are charged off, even though partial or full recovery may be possible in the future.

An analysis of the loan portfolio by loan grade, segregated by class of loans, as of March 31, 2019 and December 31, 2018, is as follows (in thousands):

	Loans With A Grade Of:
	A, B or C		S		D		E		F	Total
March 31, 2019:
Gaming	$	19,690	$		$	4,685	$		$	$	24,375
Hotel/Motel		45,402									45,402
Real estate, construction		25,714				229		1,266			27,209
Real estate, mortgage		104,928		15,422		12,538		3,550			136,438
Commercial and industrial		17,279		8,807		162		1,460			27,708
Other		6,344				13		3			6,360
Total	$	219,357	$	24,229	$	17,627	$	6,279	$	$	267,492
December 31, 2018:
Gaming	$	21,080	$		$	4,687	$		$	$	25,767
Hotel/Motel		44,112									44,112
Real estate, construction		29,930				217		1,450			31,597
Real estate, mortgage		108,885		10,430		12,992		5,130			137,437
Commercial and industrial		25,335				218		1,952			27,505
Other		6,904				20		4			6,928
Total	$	236,246	$	10,430	$	18,134	$	8,536	$	$	273,346

17

A loan may be impaired but not on nonaccrual status when the loan is well secured and in the process of collection.    Total loans on nonaccrual as of March 31, 2019 and December 31, 2018, are as follows (in thousands):

	March 31, 2019		December 31, 2018
Real estate, construction	$	1,266	$	1,439
Real estate, mortgage		3,464		4,954
Commercial and industrial		1,369		1,855
Other		3		2
Total	$	6,102	$	8,250

Prior to 2018, certain loans were modified by granting interest rate concessions to these customers with such loans being classified as troubled debt restructurings. During 2018 and 2019, the Company did not restructure any additional loans. Specific reserves of $65,571 and $69,000 were allocated to troubled debt restructurings as of March 31, 2019 and December 31, 2018, respectively. The Bank had no commitments to lend additional amounts to customers with outstanding loans classified as troubled debt restructurings as of March 31, 2019 and December 31, 2018.

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Impaired loans, which include loans classified as nonaccrual and troubled debt restructurings, segregated by class of loans, as of March 31, 2019 and December 31, 2018, are as follows (in thousands):

	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
March 31, 2019:
With no related allowance recorded:
Real estate, construction	$	1,004	$	617	$		$	617	$
Real estate, mortgage		3,808		3,808				3,833		7
Commercial and industrial		1,597		1,369				1,417
Other		2		2				2
Total		6,411		5,796				5,869		7
With a related allowance recorded:
Real estate, construction		736		649		255		651
Real estate, mortgage		736		736		136		704		7
Other		1		1		1		1
Total		1,473		1,386		392		1,356		7
Total by class of loans:
Real estate, construction		1,740		1,266		255		1,268
Real estate, mortgage		4,544		4,544		136		4,537		14
Commercial and industrial		1,597		1,369				1,417
Other		3		3		1		3
Total	$	7,884	$	7,182	$	392	$	7,225	$	14

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	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
December 31, 2018:
With no related allowance recorded:
Real estate, construction	$	1,171	$	784	$		$	785	$
Real estate, mortgage		5,508		5,474				5,826		29
Commercial and industrial		2,083		1,855				2,204
Other		2		2				3
Total		8,764		8,115				8,818		29
With a related allowance recorded:
Real estate, construction		742		655		283		633
Real estate, mortgage		574		574		101		589		25
Total		1,316		1,229		384		1,222		25
Total by class of loans:
Real estate, construction		1,913		1,439		283		1,418
Real estate, mortgage		6,082		6,048		101		6,415		54
Commercial and industrial		2,083		1,855				2,204
Other		2		2				3
Total	$	10,080	$	9,344	$	384	$	10,040	$	54

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6. Allowance for Loan Losses:

Transactions in the allowance for loan losses for the three months ended March 31, 2019 and 2018, and the balances of loans, individually and collectively evaluated for impairment, as of March 31, 2019 and 2018, are as follows (in thousands):

	Gaming			Hotel/Motel		Real Estate, Construction			Real Estate, Mortgage			Commercial and Industrial			Other			Total
For the Quarter Ended March 31, 2019:
Allowance for Loan Losses:
Beginning Balance	$	416		$	1,443	$	429		$	2,443		$	476		$	133		$	5,340
Charge-offs																(76	)		(76	)
Recoveries							2			2			14			40			58
Provision		(17	)		174		(30	)		(85	)		(10	)		22			54
Ending Balance	$	399		$	1,617	$	401		$	2,360		$	480		$	119		$	5,376
Allowance for loan losses, March 31, 2019:
Ending balance: individually evaluated for impairment	$			$		$	255		$	345		$	108		$	2		$	710
Ending balance: collectively evaluated for impairment	$	399		$	1,617	$	146		$	2,015		$	372		$	117		$	4,666
Total Loans, March 31, 2019:
Ending balance: individually evaluated for impairment	$	4,685		$		$	1,495		$	16,088		$	1,622		$	16		$	23,906
Ending balance: collectively evaluated for impairment	$	19,690		$	45,402	$	25,714		$	120,350		$	26,086		$	6,344		$	243,586
	Gaming			Hotel/Motel		Real Estate, Construction			Real Estate, Mortgage			Commercial and Industrial			Other			Total
For the Quarter Ended March 31, 2018:
Allowance for Loan Losses:
Beginning Balance	$	536		$	936	$	242		$	3,369		$	892		$	178		$	6,153
Charge-offs										(14	)		(44	)		(94	)		(152	)
Recoveries										118			13			45			176
Provision		(98	)		246		(12	)		(70	)		(63	)		32			35
Ending Balance	$	438		$	1,182	$	230		$	3,403		$	798		$	161		$	6,212
Allowance for loan losses, March 31, 2018:
Ending balance: individually evaluated for impairment	$			$		$	138		$	1,080		$	560		$	3		$	1,781
Ending balance: collectively evaluated for impairment	$	438		$	1,182	$	92		$	2,323		$	238		$	158		$	4,431
Total Loans, March 31, 2018:
Ending balance: individually evaluated for impairment	$			$		$	1,655		$	23,656		$	2,913		$	12		$	28,236
Ending balance: collectively evaluated for impairment	$	24,475		$	38,247	$	26,662		$	130,553		$	21,025		$	6,254		$	247,216

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7. Deposits:

Time deposits of $250,000 or more totaled approximately $43,011,000 and $32,137,000 at March 31, 2019 and December 31, 2018, respectively.

8. Fair Value Measurements and Disclosures:

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Available for sale securities are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record other assets at fair value on a non-recurring basis, such as impaired loans and ORE. These non-recurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets. Additionally, the Company is required to disclose, but not record, the fair value of other financial instruments.

Fair Value Hierarchy

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets.

Level 2 - Valuation is based upon quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 - Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques.

Following is a description of valuation methodologies used to determine the fair value of financial assets and liabilities.

Cash and Due from Banks

The carrying amount shown as cash and due from banks approximates fair value.

Available for Sale Securities

The fair value of available for sale securities is based on quoted market prices. The Company’s available for sale securities are reported at their estimated fair value, which is determined utilizing several sources. The primary source is Interactive Data Corporation, which utilizes pricing models that vary based on asset class and include available trade, bid and other market information and whose methodology includes broker quotes, proprietary models and vast descriptive databases. Another source for determining fair value is matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices

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for the specific securities but rather by relying on the securities’ relationship to other benchmark securities. The Company’s available for sale securities for which fair value is determined through the use of such pricing models and matrix pricing are classified as Level 2 assets. If the fair value of available for sale securities is generated through model-based techniques, including the discounting of estimated cash flows, such securities are classified as Level 3 assets.

Held to Maturity Securities

The fair value of held to maturity securities is based on quoted market prices.

Other Investments

The carrying amount shown as other investments approximates fair value.

Federal Home Loan Bank Stock

The carrying amount shown as Federal Home Loan Bank Stock approximates fair value.

Loans

The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings for the remaining maturities. The cash flows considered in computing the fair value of such loans are segmented into categories relating to the nature of the contract and collateral based on contractual principal maturities. Appropriate adjustments are made to reflect probable credit losses. Cash flows have not been adjusted for such factors as prepayment risk or the effect of the maturity of balloon notes. The fair value of floating rate loans is estimated to be its carrying value. At each reporting period, the Company determines which loans are impaired. Accordingly, the Company’s impaired loans are reported at their estimated fair value on a non-recurring basis. An allowance for each impaired loan, which are generally collateral-dependent, is calculated based on the fair value of its collateral. The fair value of the collateral is based on appraisals performed by third-party valuation specialists. Factors including the assumptions and techniques utilized by the appraiser are considered by Management. If the recorded investment in the impaired loan exceeds the measure of fair value of the collateral, a valuation allowance is recorded as a component of the allowance for loan losses. Impaired loans are non-recurring Level 3 assets.

Other Real Estate

In the course of lending operations, Management may determine that it is necessary to foreclose on the related collateral. Other real estate acquired through foreclosure is carried at fair value, less estimated costs to sell. The fair value of the collateral is based on appraisals performed by third-party valuation specialists. Factors including the assumptions and techniques utilized by the appraiser are considered by Management. If the current appraisal is more than one year old and/or the loan balance is more than $200,000, a new appraisal is obtained. Otherwise, the Bank uses a third-party desktop appraisal service to determine the fair value of the collateral, based on comparable sales, market conditions, Management’s plans for disposition and other estimates of fair value obtained from principally independent sources, adjusted for estimated selling costs. Other real estate is a non-recurring Level 3 asset.

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Cash Surrender Value of Life Insurance

The carrying amount of cash surrender value of bank-owned life insurance approximates fair value.

Deposits

The fair value of non-interest bearing demand and interest bearing savings and demand deposits is the amount reported in the financial statements. The fair value of time deposits is estimated by discounting the cash flows using current rates of time deposits with similar remaining maturities. The cash flows considered in computing the fair value of such deposits are based on contractual maturities, since approximately 98% of time deposits provide for automatic renewal at current interest rates.

Borrowings from Federal Home Loan Bank

The fair value of Federal Home Loan Bank (“FHLB”) fixed rate borrowings is estimated using discounted cash flows based on current incremental borrowing rates for similar types of borrowing arrangements. The fair value of FHLB variable rate borrowings is estimated to be its carrying value.

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The balances of available for sale securities, which are the only assets measured at fair value on a recurring basis, by level within the fair value hierarchy and by investment type, as of March 31, 2019 and December 31, 2018 are as follows (in thousands):

			Fair Value Measurements Using
	Total		Level 1	Level 2		Level 3
March 31, 2019:
U.S. Treasuries	$	84,328	$	$	84,328	$
U.S. Government agencies		12,417			12,417
Mortgage-backed securities		109,383			109,383
Collateralized mortgage obligations		4,909			4,909
States and political subdivisions		11,082			11,082
Total	$	222,119	$	$	222,119	$
December 31, 2018:
U.S. Treasuries	$	83,423	$	$	83,423	$
U.S. Government agencies		17,247			17,247
Mortgage-backed securities		110,344			110,344
States and political subdivisions		11,096			11,096
Total	$	222,110	$	$	222,110	$

Impaired loans, which are measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of March 31, 2019 and December 31, 2018 are as follows (in thousands):    

			Fair Value Measurements Using
	Total		Level 1	Level 2	Level 3
March 31, 2019	$	2,932	$	$	$	2,932
December 31, 2018		3,311				3,311

Other real estate, which is measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of March 31, 2019 and December 31, 2018 are as follows (in thousands):

			Fair Value Measurements Using
	Total		Level 1	Level 2	Level 3
March 31, 2019	$	8,873	$	$	$	8,873
December 31, 2018		8,943				8,943

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The following table presents a summary of changes in the fair value of other real estate which is measured using level 3 inputs (in thousands):

	For the Three			For the Year
	Months Ended			Ended
	March 31, 2019			December 31, 2018
Balance, beginning of period	$	8,943		$	8,232
Loans transferred to ORE		369			4,707
Sales		(439	)		(3,232	)
Writedowns					(764	)
Balance, end of period	$	8,873		$	8,943

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The carrying value and estimated fair value of financial instruments, by level within the fair value hierarchy, at March 31, 2019 and December 31, 2018, are as follows (in thousands):

	Carrying		Fair Value Measurements Using
	Amount		Level 1		Level 2		Level 3		Total
March 31, 2019:
Financial Assets:
Cash and due from banks	$	39,087	$	39,087	$		$		$	39,087
Available for sale securities		222,119				222,119				222,119
Held to maturity securities		54,632				54,512				54,512
Other investments		2,751		2,751						2,751
Federal Home Loan Bank stock		2,077				2,077				2,077
Loans, net		262,116						254,111		254,111
Other real estate		8,873						8,873		8,873
Cash surrender value of life insurance		18,982				18,982				18,982
Financial Liabilities:
Deposits:
Non-interest bearing		130,184		130,184						130,184
Interest bearing		391,153						391,727		391,727
Borrowings from Federal Home Loan
Bank		1,068				1,245				1,245

December 31, 2018:
Financial Assets:
Cash and due from banks	$	17,191	$	17,191	$		$		$	17,191
Available for sale securities		222,110				222,110				222,110
Held to maturity securities		54,598				53,459				53,459
Other investments		2,811		2,811						2,811
Federal Home Loan Bank stock		2,069				2,069				2,069
Loans, net		268,006						260,560		260,560
Other real estate		8,943						8,943		8,943
Cash surrender value of life insurance		18,841				18,841				18,841
Financial Liabilities:
Deposits:
Non-interest bearing		114,512		114,512						114,512
Interest bearing		358,994						359,386		359,386
Borrowings from Federal Home Loan
Bank		36,142				36,211				36,211

9. Reclassifications:

Certain reclassifications have been made to prior year statements to conform to current year presentation. The reclassifications had no effect on prior year net income.

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Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

GENERAL

The Company is a one-bank holding company headquartered in Biloxi, Mississippi. The Company has two operating subsidiaries, PFC Service Corp., an inactive company, and The Peoples Bank, Biloxi, Mississippi (the “Bank”). The Bank provides a full range of banking, financial and trust services to state, county and local government entities and individuals and small and commercial businesses operating in those portions of Mississippi, Louisiana and Alabama which are within a fifty mile radius of the Waveland, Wiggins and Gautier branches, the Bank’s three most outlying locations (the “trade area”).

The following presents Management’s discussion and analysis of the consolidated financial condition and results of operations of Peoples Financial Corporation and Subsidiaries. These comments should be considered in combination with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this report on Form 10-Q and the Consolidated Financial Statements, Notes to Consolidated Financial Statements and Management’s Discussion and Analysis included in the Company’s Form 10-K for the year ended December 31, 2018.

Forward-Looking Information

Congress passed the Private Securities Litigation Act of 1995 in an effort to encourage corporations to provide information about a company’s anticipated future financial performance. This act provides a safe harbor for such disclosure which protects the companies from unwarranted litigation if actual results are different from management expectations. This report contains forward-looking statements and reflects industry conditions, company performance and financial results. These forward-looking statements are subject to a number of factors and uncertainties which could cause the Company’s actual results and experience to differ from the anticipated results and expectations expressed in such forward-looking statements. Such factors and uncertainties include, but are not limited to: changes in interest rates and market prices, changes in local economic and business conditions, increased competition for deposits and loans, a deviation in actual experience from the underlying assumptions used to determine and establish the allowance for loan losses, changes in the availability of funds resulting from reduced liquidity, changes in government regulations and acts of terrorism, weather or other events beyond the Company’s control.

New Accounting Pronouncements

The Company is in the process of determining the effect of Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which will be effective for the Company on January 1, 2020, on its financial position, results of operations or cash flows. Further disclosure relating to these efforts in included in Note A.

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Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company evaluates these estimates and assumptions on an on-going basis using historical experience and other factors, including the current economic environment. We adjust such estimates and assumptions when facts and circumstances dictate. Certain critical accounting policies affect the more significant estimates and assumptions used in the preparation of the consolidated financial statements.

Investments

Investments which are classified as available for sale are stated at fair value.    A decline in the market value of an investment below cost that is deemed to be other-than-temporary is charged to earnings for the decline in value deemed to be credit related and a new cost basis in the security is established. The decline in value attributed to non-credit related factors is recognized in other comprehensive income. The determination of the fair value of securities may require Management to develop estimates and assumptions regarding the amount and timing of cash flows.

Allowance for loan losses

The Company’s most critical accounting policy relates to its allowance for loan losses (“ALL”), which reflects the estimated losses resulting from the inability of its borrowers to make loan payments. The ALL is established and maintained at an amount sufficient to cover the estimated loss associated with the loan portfolio of the Company as of the date of the financial statements. Credit losses arise not only from credit risk, but also from other risks inherent in the lending process including, but not limited to, collateral risk, operation risk, concentration risk and economic risk. As such, all related risks of lending are considered when assessing the adequacy of the ALL. On a quarterly basis, Management estimates the probable level of losses to determine whether the allowance is adequate to absorb reasonably foreseeable, anticipated losses in the existing portfolio based on our past loan loss experience, known and inherent risk in the portfolio, adverse situations that may affect the borrowers’ ability to repay and the estimated value of any underlying collateral and current economic conditions. Management believes that the ALL is adequate and appropriate for all periods presented in these financial statements. If there was a deterioration of any of the factors considered by Management in evaluating the ALL, the estimate of loss would be updated, and additional provisions for loan losses may be required. The analysis divides the portfolio into two segments: a pool analysis of loans based upon a five year average loss history which is updated on a quarterly basis and which may be adjusted by qualitative factors by loan type and a specific reserve analysis for those loans considered impaired under GAAP. All credit relationships with an outstanding balance of $100,000 or greater that are included in Management’s loan watch list are individually reviewed for impairment. All losses are charged to the ALL when the loss actually occurs or when a determination is made that a loss is likely to occur; recoveries are credited to the ALL at the time of receipt.

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Other Real Estate

Other real estate (“ORE”) includes real estate acquired through foreclosure. Each other real estate property is carried at fair value, less estimated costs to sell. Fair value is principally based on appraisals performed by third-party valuation specialists.    If Management determines that the fair value of a property has decreased subsequent to foreclosure, the Company records a write down which is included in non-interest expense.

Employee Benefit Plans

Employee benefit plan liabilities and pension costs are determined utilizing actuarially determined present value calculations. The valuation of the benefit obligation and net periodic expense is considered critical, as it requires Management and its actuaries to make estimates regarding the amount and timing of expected cash outflows including assumptions about mortality, expected service periods and the rate of compensation increases.

Income Taxes

GAAP requires the asset and liability approach for financial accounting and reporting for deferred income taxes. We use the asset and liability method of accounting for deferred income taxes and provide deferred income taxes for all significant income tax temporary differences. As part of the process of preparing our consolidated financial statements, the Company is required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as the provision for loan losses, for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities that are included in our consolidated statement of condition. We must also assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we must establish a valuation allowance. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. To the extent the Company establishes a valuation allowance or adjusts this allowance in a period, we must include an expense or a benefit within the tax provisions in the consolidated statement of income.

GAAP Reconciliation and Explanation

This Form 10-Q contains non-GAAP financial measures determined by methods other than in accordance with GAAP. Such non-GAAP financial measures include taxable equivalent interest income and taxable equivalent net interest income. Management uses these non-GAAP financial measures because it believes they are useful for evaluating our operations and performance over periods of time, as well as in managing and evaluating our business and in discussions about our operations and performance. Management believes these non-GAAP financial measures provide users of our financial information with a meaningful measure for assessing our financial results, as well as comparison to financial results for prior periods. These non-GAAP financial measures should not be considered as a substitute for operating results determined in accordance with GAAP and may not be comparable to other similarly titled financial measures used by other companies. A reconciliation of these operating performance measures to GAAP performance measures for the three months ended March 31, 2019 and 2018 is included in the table on the following page.

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RECONCILIATION OF NON-GAAP PERFORMANCE MEASURES (In thousands)

For the Three Months Ended March 31,	2019			2018
Interest income reconciliation:
Interest income - taxable equivalent	$	5,559		$	4,828
Taxable equivalent adjustment		(59	)		(63	)
Interest income (GAAP)	$	5,500		$	4,765
Net interest income reconciliation:
Net interest income - taxable equivalent	$	4,679		$	4,332
Taxable equivalent adjustment		(59	)		(63	)
Net interest income (GAAP)	$	4,620		$	4,269

OVERVIEW

The Company is a community bank serving the financial and trust needs of its customers in our trade area, which is defined as those portions of Mississippi, Louisiana and Alabama which are within a fifty mile radius of the Waveland, Wiggins and Gautier branches, the bank subsidiary’s three most outlying locations. Maintaining a strong core deposit base and providing commercial and real estate lending in our trade area are the traditional focuses of the Company. Growth has largely been achieved through de novo branching activity, and it is expected that these strategies will continue to be emphasized in the future.

The Company reported net income of $405,000 for the first quarter of 2019 compared with net income of $292,000 for the first quarter of 2018. Results in 2019 included the increase in net interest income which was partially offset by a decrease in non-interest income and increase in non-interest expense as compared with 2018.

Managing the net interest margin is a key component of the Company’s earnings strategy. Interest income increased as interest and fees on loans increased $456,000 and interest income on mortgage-backed securities increased $272,000 as compared with 2018. This increase was partially offset by the increase in interest expense of $384,000.

Monitoring asset quality, estimating potential losses in our loan portfolio and addressing non-performing loans continue to be a major focus of the Company. A provision for the allowance for loan losses of $54,000 was recorded in 2019 as compared with $35,000 in 2018. The Company is working diligently to address and reduce its non-performing assets. The Company’s nonaccrual loans totaled $6,102,000 and $8,250,000 at March 31, 2019 and December 31, 2018, respectively. Most of these loans are collateral-dependent, and the Company has rigorously evaluated the value of its collateral to determine potential losses.

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Non-interest income decreased $96,000 for the three months ended March 31, 2019 as compared with 2018 results. Trust department income and fees decreased $62,000 for 2019 and service charges on deposit accounts decreased $29,000 as compared with 2018.

Non-interest expense increased $123,000 for the three months ended March 31, 2019 as compared with 2018 results. This increase for the three months ended March 31, 2019 was primarily the result of the decrease in salaries and employee benefits of $95,000 and other real estate expense of $70,000, while equipment rentals, depreciation and maintenance expenses increased $75,000 and other expense increased $119,000 in 2019 as compared with 2018.

Total assets at March 31, 2019 increased $16,175,000 as compared with December 31, 2018. Total deposits increased $47,831,000 as governmental entities’ balances increased due to tax collections. This increase in funds resulted in the decrease in borrowings from the Federal Home Loan Bank of $35,074,000 and the increase in cash and due from banks of $21,896,000.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income, the amount by which interest income on loans, investments and other interest- earning assets exceeds interest expense on deposits and other borrowed funds, is the single largest component of the Company’s income. Management’s objective is to provide the largest possible amount of income while balancing interest rate, credit, liquidity and capital risk. Changes in the volume and mix of interest earning assets and interest-bearing liabilities combined with changes in market rates of interest directly affect net interest income.

The Company’s average interest earning assets decreased approximately $18,448,000, or 3%, from approximately $584,972,000 for the first quarter of 2018 to approximately $566,524,000 for the first quarter of 2019. The Company’s average balance sheet decreased primarily as average loans decreased approximately $8,170,000 and average taxable available for sale securities decreased approximately $18,611,000 while balances due from financial institutions increased $7,811,000 for the first quarter of 2019 as compared with the first quarter of 2018. Average loans decreased as principal payments, maturities, charge-offs and foreclosures relating to existing loans outpaced new loans. Average taxable available for sale securities decreased as average deposits decreased for the same time periods. Average balances due from financial institutions increased as the Company manages its liquidity position.

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The average yield on interest-earning assets increased from 3.30% for the first quarter of 2018 to 3.92% for the first quarter of 2019. This increase is primarily the result of the yield on average loans increasing as a result of the increase in prime rate in 2018 as well the recovery of $135,000 in interest income on a previously non-performing loan.

Average interest-bearing liabilities decreased approximately $17,223,000, or 4%, from approximately $428,776,000 for the first quarter of 2018 to approximately $411,553,000 for the first quarter of 2019. Average savings and interest bearing DDA decreased $26,366,000 primarily as several large customers reallocated their funds to other institutions.    

The average rate paid on interest bearing liabilities for the first quarter of 2018 was .46% as compared with .86% for the first quarter of 2019. This increase is primarily due to increases in rates by the Federal Reserve Bank in 2018.    

The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 2.96% for the quarter ended March 31, 2018 and 3.30% for the quarter ended March 31, 2019.

The tables on the following pages analyze the changes in tax-equivalent net interest income for the quarters ended March 31, 2019 and 2018.

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Analysis of Average Balances, Interest Earned/Paid and Yield (In Thousands)

	Three Months Ended March 31, 2019							Three Months Ended March 31, 2018
	Average Balance		Interest Earned/Paid		Rate			Average Balance		Interest Earned/Paid		Rate
Loans (2)(3)	$	269,872	$	3,689		5.47	%	$	278,042	$	3,233		4.65	%
Balances due from financial institutions		18,589		87		1.87	%		10,778		38		1.41	%
HTM:
Taxable		37,078		271		2.92	%		32,517		232		2.85	%
Non taxable (1)		17,496		157		3.59	%		18,547		146		3.15	%
AFS:
Taxable		210,320		1,211		2.30	%		228,931		1,011		1.77	%
Non taxable (1)		11,092		133		4.80	%		14,302		165		4.61	%
Other		2,077		11		2.12	%		1,855		3		0.65	%
Total	$	566,524	$	5,559		3.92	%	$	584,972	$	4,828		3.30	%
Savings & interest-bearing DDA	$	314,018	$	491		0.63	%	$	340,384	$	282		0.33	%
Time deposits		86,968		311		1.43	%		83,909		189		0.90	%
Federal funds purchased									769		5		2.60	%
Borrowings from FHLB		10,557		78		2.96	%		3,714		20		2.15	%
Total	$	411,543	$	880		0.86	%	$	428,776	$	496		0.46	%
Net tax-equivalent spread						3.07	%						2.84	%
Net tax-equivalent margin on earning assets						3.30	%						2.96	%

(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 21% in 2019 and 2018. See disclosure of Non-GAAP financial measures on pages 30 and 31.

(2) Loan fees of $73 and $122 for 2019 and 2018, respectively, are included in these figures.

(3) Includes nonaccrual loans.

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Analysis of Changes in Interest Income and Interest Expense

(In Thousands)

	For the Three Months Ended
	March 31, 2019 compared with March 31, 2018
	Volume			Rate		Rate/Volume			Total
Interest earned on:
Loans	$	(95	)	$	568	$	(17	)	$	456
Balances due from finanicial institutions		28			12		9			49
Held to maturity securities:
Taxable		32			6		1			39
Non taxable		(8	)		20		(1	)		11
Available for sale securities:
Taxable		(82	)		307		(25	)		200
Non taxable		(37	)		6		(1	)		(32	)
Other					7		1			8
Total	$	(162	)	$	926	$	(33	)	$	731
Interest paid on:
Savings & interest-bearing DDA	$	(22	)	$	250	$	(19	)	$	209
Time deposits		7			111		4			122
Federal funds purchased		(5	)							(5	)
Borrowings from FHLB		37			8		13			58
Total	$	17		$	369	$	(2	)	$	384

Provision for Loan Losses

In the normal course of business, the Company assumes risk in extending credit to its customers. This credit risk is managed through compliance with the loan policy, which is approved by the Board of Directors. The policy establishes guidelines relating to underwriting standards, including but not limited to financial analysis, collateral valuation, lending limits, pricing considerations and loan grading. The Company’s Loan Review and Special Assets Departments play key roles in monitoring the loan portfolio and managing problem loans. New loans and, on a periodic basis, existing loans are reviewed to evaluate compliance with the loan policy. Loan customers in concentrated industries such as gaming and hotel/motel, as well as the exposure for out of area;

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residential and land development; construction and commercial real estate loans, and their direct and indirect impact on its operations are evaluated on a monthly basis. Loan delinquencies and deposit overdrafts are closely monitored in order to identify developing problems as early as possible. Lenders experienced in workout scenarios consult with loan officers and customers to address non-performing loans. A watch list of credits which pose a potential loss to the Company is prepared based on the loan grading system. This list forms the foundation of the Company’s allowance for loan loss computation.

Management relies on its guidelines and existing methodology to monitor the performance of its loan portfolio and identify and estimate potential losses based on the best available information. The potential effect of the continuing decline in real estate values and actual losses incurred by the Company were key factors in our analysis. Much of the Company’s loan portfolio is collateral-dependent, requiring careful consideration of changes in the value of the collateral.

The Company’s analysis includes evaluating the current values of collateral securing all nonaccrual loans. Even though nonaccrual loans were $6,102,000 and $8,250,000 at March 31, 2019 and December 31, 2018, respectively, specific reserves of only $326,000 and $315,000, respectively, have been allocated to these loans as collateral values appear sufficient to cover loan losses or the loan balances have been charged down to their realizable value.

The Company’s on-going, systematic evaluation resulted in the Company recording a provision for loan losses of $54,000 and $35,000 for the first quarters of 2019 and 2018, respectively. The allowance for loan losses as a percentage of loans was 2.01% and 1.95% at March 31, 2019 and December 31, 2018, respectively. The Company believes that its allowance for loan losses is appropriate as of March 31, 2019.

The allowance for loan losses is an estimate, and as such, events may occur in the future which may affect its accuracy. The Company anticipates that it is possible that additional information will be gathered in future quarters which may require an adjustment to the allowance for loan losses. Management will continue to closely monitor its portfolio and take such action as it deems appropriate to accurately report its financial condition and results of operations.

Non-interest income

Non-interest income decreased $96,000 for the first quarter of 2019 as compared with the first quarter of 2018 primarily as Trust department income and fees decreased $62,000 and service charges on deposit accounts decreased $29,000.

Trust income decreased due to the decrease in account relationships in 2019.

Service charges on deposits decreased primarily as NSF fees on personal accounts decreased.

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Non-interest expense

Total non-interest expense increased $123,000 for the first quarter of 2019 as compared with the first quarter of 2018. Salaries and employee benefits decreased $95,000 and other real estate expenses decreased $70,000 while equipment rentals, depreciation and maintenance increased $75,000, the loss from other investments increased $21,000 and other expenses increased $119,000 for the first quarter of 2019 as compared with the first quarter of 2018.

Salaries decreased as a result of attrition.

Equipment rentals, depreciation and maintenance increased as a result of the Company’s upgrade of its data processing.

Other real estate expense decreased as maintenance and repairs on ORE have decreased in the current year.

The loss from other investments relates to income or loss from operations of an investment in a low-income housing partnership. In 2019, occupancy rates have decreased, which resulted in a larger loss.

Other expense primarily increased in 2019 as the Company engaged consultants to assist with several projects relating to operations and strategic planning in the current year.

FINANCIAL CONDITION

Cash and due from banks increased $21,896,000 at March 31, 2019, compared with December 31, 2018 in the management of the bank subsidiary’s liquidity position.

Loans decreased $5,854,000 at March 31, 2019 as compared with December 31, 2018 as principal payments, maturities, charge-offs and foreclosures on existing loans exceeded new loans.

Total deposits increased $47,831,000 at March 31, 2019, as compared with December 31, 2018. Typically, significant increases or decreases in total deposits and/or significant fluctuations among the different types of deposits from quarter to quarter are anticipated by Management as customers in the casino industry and county and municipal entities reallocate their resources periodically. Deposits from county and municipal entities increased significantly during the first quarter of each year based on property tax collections.

Borrowings from the Federal Home Loan Bank decreased $35,074,000 at March 31, 2019 compared with December 31, 2018 as the Company utilized funds from increased deposits to reduce borrowings.

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SHAREHOLDERS’ EQUITY AND CAPITAL ADEQUACY

Strength, security and stability have been the hallmark of the Company since its founding in 1985 and of its bank subsidiary since its founding in 1896. A strong capital foundation is fundamental to the continuing prosperity of the Company and the security of its customers and shareholders.

As of March 31, 2019, the most recent notification from the Federal Deposit Insurance Corporation categorized the bank subsidiary as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the bank subsidiary must have a Total risk-based capital ratio of 10.00% or greater, a Common Equity Tier 1 Capital ratio of 6.50% or greater, a Tier 1 risk-based capital ratio of 8.00% or greater and a Leverage capital ratio of 5.00% or greater. As of January 1, 2019, the Company must have a capital conservation buffer above these requirements of 2.50%. There are no conditions or events since that notification that Management believes have changed the bank subsidiary’s category.

The Company’s actual capital amounts and ratios and required minimum capital amounts and ratios as of March 31, 2019 and December 31, 2018, are as follows (in thousands):

	Actual					For Capital Adequacy Purposes
	Amount		Ratio			Amount		Ratio
March 31, 2019:
Total Capital (to Risk Weighted Assets)	$	95,943		25.88	%	$	29,664		8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		91,299		24.62	%		16,686		4.50	%
Tier 1 Capital (to Risk Weighted Assets)		91,299		24.62	%		22,248		6.00	%
Tier 1 Capital (to Average Assets)		91,299		14.61	%		24,995		4.00	%
December 31, 2018:
Total Capital (to Risk Weighted Assets)	$	95,627		25.30	%	$	30,240		8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		90,894		24.05	%		17,010		4.50	%
Tier 1 Capital (to Risk Weighted Assets)		90,894		24.05	%		22,680		6.00	%
Tier 1 Capital (to Average Assets)		90,894		14.35	%		25,344		4.00	%

The actual capital amounts and ratios and required minimum capital amounts and ratios for the Bank as of March 31, 2019 and December 31, 2018, are as follows (in thousands):

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2019:
Total Capital (to Risk Weighted Assets)	$	92,872		25.19	%	$	29,500		8.00	%	$	36,875		10.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		88,254		23.93	%		16,594		4.50	%		23,969		6.50	%
Tier 1 Capital (to Risk Weighted Assets)		88,254		23.93	%		22,125		6.00	%		29,500		8.00	%
Tier 1 Capital (to Average Assets)		88,254		13.85	%		25,480		4.00	%		31,850		5.00	%
December 31, 2018:
Total Capital (to Risk Weighted Assets)	$	92,485		24.61	%	$	30,062		8.00	%	$	37,577		10.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		87,780		23.36	%		16,910		4.50	%		24,425		6.50	%
Tier 1 Capital (to Risk Weighted Assets)		87,780		22.36	%		22,546		6.00	%		30,062		8.00	%
Tier 1 Capital (to Average Assets)		87,780		14.11	%		24,884		4.00	%		31,105		5.00	%

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Management continues to emphasize the importance of maintaining the appropriate capital levels of the Company and has established the goal of being “well-capitalized” by the banking regulatory authorities.

LIQUIDITY

Liquidity represents the Company’s ability to adequately provide funds to satisfy demands from depositors, borrowers and other commitments by either converting assets to cash or accessing new or existing sources of funds. Management monitors these funds requirements in such a manner as to satisfy these demands and provide the maximum earnings on its earning assets. The Company manages and monitors its liquidity position through a number of methods, including through the computation of liquidity risk targets and the preparation of various analyses of its funding sources and utilization of those sources on a monthly basis. The Company also uses proforma liquidity projections which are updated on a monthly basis in the management of its liquidity needs and also conducts periodic contingency testing on its liquidity plan.

Deposits, payments of principal and interest on loans, proceeds from maturities of investment securities and earnings on investment securities are the principal sources of funds for the Company. Borrowings from the FHLB, federal funds sold and federal funds purchased are utilized by the Company to manage its daily liquidity position. The Company has also been approved to participate in the Federal Reserve Bank’s Discount Window Primary Credit Program, which it intends to use only as a contingency.

REGULATORY MATTERS

During 2016, Management identified opportunities for improving information technology operations and security, risk management and earnings, addressing asset quality concerns, analyzing and assessing the Bank’s management and staffing needs, and managing concentrations of credit risk as a result of its own investigation as well as examinations performed by certain bank regulatory agencies. In concert with the regulators, the Company had identified specific corrective steps and actions to enhance its information technology operations and security, risk management, earnings, asset quality and staffing. The Company and the Bank may not declare or pay any cash dividends without the prior written approval of their regulators.

Item 4: Controls and Procedures

As of March 31, 2019, an evaluation was performed under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There were no changes in the Company’s internal control over financial reporting that occurred during the period ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1: Legal Proceedings

The Bank is involved in various legal matters and claims which are being defended and handled in the ordinary course of business. None of these matters is expected, in the opinion of Management, to have a material adverse effect upon the financial position or results of operations of the Company.

Item 5: Other Information

None.

Item 6 - Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit 31.1:	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002
Exhibit 31.2:	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002
Exhibit 32.1:	Certification of Chief Executive Officer Pursuant to 18 U.S.C. ss. 1350
Exhibit 32.2:	Certification of Chief Financial Officer Pursuant to 18 U.S.C. ss. 1350
Exhibit 101	The following materials from the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2019, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Condition at March 31, 2019 and December 31, 2018, (ii) Consolidated Statements of Income for the quarters ended March 31, 2019 and 2018, (iii) Consolidated Statements of Comprehensive Income for the quarters ended March 31, 2019 and 2018, (iv) Consolidated Statements of Changes in Shareholders’ Equity for the quarters ended March 31, 2019 and 2018, (v) Consolidated Statements of Cash Flows for the quarters ended March 31, 2019 and 2018 and (vi) Notes to the Unaudited Consolidated Financial Statements for the quarters ended March 31, 2019 and 2018.

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SIGNATURES

Pursuant to the requirement of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

PEOPLES FINANCIAL CORPORATION
(Registrant)
Date:	May 13, 2019
By:	/s/ Chevis C. Swetman
	Chevis C. Swetman
Chairman, President and Chief Executive Officer
(principal executive officer)
Date:	May 13, 2019
By:	/s/ Lauri A. Wood
	Lauri A. Wood
Chief Financial Officer and Controller
(principal financial and accounting officer)

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